Sales Inducements: Let’s make a deal

The rise of direct insurers has energized discussion about regulating product sales inducements. While many brokers fight to maintain the prohibition on inducements, others are asking the question, “who are we protecting?” And regulators are starting to respond, rewriting the books on how insurance is sold

From toasters to trips for two, the world of marketing is changing, and the way insurance is retailed needs to change right along with it say some quarters of the industry. Traditionally, sales inducements, either product inducements or rebates, have been prohibited by provincial legislation. But, the tide seems to be turning. Alberta has already removed the ban on inducements, with the Atlantic provinces set to follow suit, and other provinces are looking into the inducement issue.

Pressure is coming not only from consumer expectations, but also from within the industry to open up marketing practices. Direct writers in particular have a stake in this marketing approach, admits Canadian Direct vice president Colin Brown, who suggests inducements are one of the few ways for insurers to set themselves apart from one another in the marketplace. But brokers, he argues, could also use inducements as a way to distinguish their name in the consumer’s mind. “It’s more of an issue for direct writers because we’re out there advertising, but, in reality, it’s true for any arm of the business…what’s the hook to get the customer to come to you?”

If customers can receive such inducements when they purchase other products, what is it that sets insurance apart? Brown and others argue that the insurance industry is doing consumers a disservice by not offering incentives to buy as other industries do. “Obviously consumer protection is the primary reason [for the regulations],” says Brown. “But where is the opportunity for consumers to benefit lost in the legislation?” The current restrictions reflect a demeaning view of the ability of consumers to shop wisely. “It’s a sense that consumers are pretty dumb, that they’re not smart enough to spend their money without help [from regulators].”

“You can negotiate anything else, why not insurance?” asks another industry insider.

Jeff Contant, president of HB Group, a direct writer, says he understands the need for limits on inducements because of the advantage it would give “deeper pockets” in the industry. However, because in many areas of the country inducements are allowed on ex-dates, or renewals, he says new customers are being put at a disadvantage. “If they’re going to have it on a renewal, then they should have it on the sale.” Other industries, such as mortgage brokering, have introduced inducements and not suffered. While limiting the value of inducements offered is reasonable, he says, consumers, particularly those renewing their policy, should be encouraged to shop around, and rebates and inducements may be one way to encourage this. “We need to get people to shop around [for insurance], to raise their hands and ask the questions.”

Brokers battle back

Still others, including the provincial broker associations, have come out strongly against inducements. Chief among their concerns is the potential effect allowing inducements could have on the solvency of small players in the insurance market. In a letter to British Columbia’s superintendent of insurance regulation, Chuck Byrne, executive director of the province’s broker association writes, “deep pocket players in the market, at any level of distribution, could unfairly dominate and acquire marketshare. Competitors would be forced into a downward spiral, ultimately eliminating themselves as their resources were forced to the limit.”

While inducements may seem to open up competition in the marketplace, Byrne argues that the opposite can also be true. The companies with the most money to spend on inducements could accumulate marketshare rapidly and force small companies out of the market altogether.

In Alberta, where brokers face removal of the ban on inducements when the Insurance Act rewrite takes effect, there is concern about the impact opening the market up to inducements will have on brokers, particularly those in small firms. “Smaller members [of the provincial brokers association] will start paying out of their bottom-line to ‘buy customers’…or even to maintain their existing customers,” says Rob Clarke, association president. Clarke says the association is also against any change to the inducement regulation because it “brings into play a level of professionalism that we [as an association] are trying to maintain”.

Brokers in Ontario are also calling for the status quo, says Jeff Bear, general manager of the Registered Insurance Brokers of Ontario (RIBO). At its fall members’ forum, RIBO asked for input on market conduct guidelines, in anticipation of a discussion paper on the subject expected from the Financial Services Commission of Ontario (FSCO) later this year. Members were split on the issue, some eager to keep up with consumer expectations for giveaways, and others holding firm that inducements should not be used to sell insurance. But, “the basic feeling is that people shouldn’t be buying insurance based on inducements. Feedback points to keeping [the legislation] the way it is.” RIBO’s position on inducements will stand until FSCO puts out its discussion paper, which Bear hopes will come soon. “We’ve been waiting a long time.”

Room to move

Even those who oppose the practice of inducements admit there may be room for negotiation. With the advent of travel points and other “nominal value” offerings for consumers, the question of how inducements affect competition becomes less clear. Many provinces allow travel points to be offered on insurance sales, regardless of legislation. The rationale is not only that travel points are of nominal value, but also that they are accessible by other means, that is, credit cards can be used to pay for insurance purchases which also give the buyer points. “It’s a matter of equal footing,” says Byrne. “Anyone can make a credit card purchase. The real problem is substantial gifts.”

If there is room to move, then it is the value of the inducement being offered that should be considered, says Byrne. “For example, if somebody offers a draw for a free car or gives a free pen, those are different things.” What is needed is a “test of materiality”, a standard for judging the value of an inducement or a rebate and placing limits on an acceptable level of value. “We would consider looking at an allowable level of rebating based on tests of materiality,” notes Byrne, who says he understood the concern of B.C.’s former superintendent about the “petty aspects” of some complaints being lodged on inducement practices and the expense involved in handling those complaints. While the issue rests on the backburner in B.C. for the time being, Byrne admits, “the idea of pulling the rebating section still exists.”

“There should be room for movement [in offering inducements],” says Brown, who points out that in some provinces certain inducements are already allowed, products classified as adding to the value of the policy such as smoke detectors and car alarms. And many distributors are skirting around the legislation, offering draws and free products based on obtaining a quote rather than based on the purchase, and offering incentives to existing customers as allowed by legislation. “It becomes this fine line, if someone actually has to make a purchase to get a benefit. The line has been drawn too tightly.”

More discussion is needed, says Contant, to form a set of rules that are consistent, but don’t give an unfair advantage to large companies, or even banks, who can afford to give bigger, better inducements and rebates.

Drawing the line

In the past, the lines on inducements have been drawn so broadly that even those who oppose the practice are calling for clarification. Rules that state only that inducements are prohibited on the sale of insurance do not reflect the reality of the marketplace, where some types of inducements are in fact being allowed. In On
tario, for example, auto insurers are allowed to offer items which “control or reduce risk”, such as anti-theft devices. Because of the “nebulous” nature of the legislation, says Bear, RIBO has issued a set of guidelines on market conduct to give brokers a clearer picture of what is acceptable. Even the superintendent of FSCO, Dina Palozzi, has said the current legislation on inducements is “very loose”, a situation she hopes to rectify after the release of the market conduct discussion paper. Early signs indicate the paper will call for a reduction in the limits on inducements. Palozzi herself has said, “Why shouldn’t consumers be able to have the advantage that kind of approach might provide them?”

Regulators’ change in attitude on inducements is reflected in Alberta’s legislation, which is acting as a driving force for other provinces. Winston Morris, superintendent of insurance for Newfoundland and chair of the Canadian Council of Insurance Regulators (CCIR), says the Atlantic provinces are set to adopt a similar stance on inducements. The harmonized insurance act commissioned by the four Atlantic premiers, which Morris hopes will be finalized later this year (currently a second draft has been released for discussion), “is borrowing from Alberta’s legislation”. Previously, all four provinces restricted inducements. But, Morris says, “We’re looking at all our legislation from a consumer’s perspective. If the consumer can get a benefit, and as long as it’s clearly disclosed what the incentive is, then what’s the harm?”

One reason the Atlantic act is taking its lead from Alberta is for the sake of harmonization. Criticism has been leveled at provincial regulators for not having consistent rules across the country. Larger national and international companies specifically suffer under this lack of harmonization. “The CCIR has got to get together on this,” says Contant. “You can’t run a national campaign with different offerings in each province.” Morris says the CCIR has no plans at the moment to deal with the inducement issue.

Individually, however, inducements seem to be on provincial regulators’ agendas across the country. Whether consumer or corporate demands are pushing the issue, the Alberta legislation makes it clear inducements will be up for serious discussion in the coming months. “[The issue] is not going to go away,’ predicts Brown. “As the cost of insurance goes up, people are looking for whatever break they can get.”